Question

Economics:

Answer the next question based on the following cost data for a competitive seller:

    Total Product       FC               VC

              0               $200              $0

              1                 200              70

              2                 200            120

              3                 200            150

              4                 200            220

              5                 200            300

              6                 200            390

Refer to the above data. If the product price is $68 at its optimal output, exactly how many units should be produced to maximize profits or minimize losses? How much will the profit or loss be? Show all calculations...

Answer 1

As per the given information in the question the below table is prepared

Total Product or Output (Q)	Total Fixed cost (TFC) in $	Total Variable Cost (TVC) in $	Total cost (TC) in $ = TFC + TVC	Marginal cost (MC) in $ = change in total cost (TC)/ change in output (Q)	Price or Average Revenue (AR) in $	Total Revenue (TR) in $ = AR x Q	Marginal revenue (MR) in $ = change in total revenue (TR )/ change in output (Q)	Total Profit in $ = TR-TC
0	200	0	200		68	0		-200
1	200	70	270	70	68	68	68	-202
2	200	120	320	50	68	136	68	-184
3	200	150	350	30	68	204	68	-146
4	200	220	420	70	68	272	68	-148
5	200	300	500	80	68	340	68	-160
6	200	390	590	90	68	408	68	-182

(1)At equilibrium level of output MC =MR and MC intersects MR from its below. The above conditioned is satisfied at 4^th unit of output, where the MC and MR are approximately equal.

(2) At this equilibrium level of output the competitive firm either maximizes profit of minimizes losses. In is clearly evident from the above table that at the equilibrium level of output of 4^th unit the firm operating under competitive market structure is incurring loss. So the objective of the competitive firm should be to minimize loss. The incurred loss at this level of output is =$148

However the incurred loss at 3^rd unit of output is =$146 which is very close to $148 (incurred at 4^th unit of output), but it cannot be taken as a equilibrium level of output because the at 3^rd unit of output the condition for equilibrium is not satisfied i.e., At equilibrium level of output MC =MR and MC intersects MR from its below